Question

Chec Grady and Associates performs a variety of activities related to information systems and e-commerce consulting in Toronto, Canada. The firm, which bills $178 per hour for services performed, is in a very tight local labor market and is having difficulty finding quality help for its overworked professional staff. The cost per hour for professional staff time is $88. Selected Information follows. 

• Billable hours to clients for the year totaled 9,800, consisting of Information systems services, 5,880, e-commerce consulting, 3,920. 

• Administrative cost of $438,760 was (and continues to be) allocated to both services based on billable hours. These costs consist of staff support, $232,080; In-house computing, $164,000; and miscellaneous office charges. $42,680. 

A recent analysis of staff support costs found a correlation with the number of clients served. In-house computing and miscellaneous office charges varied directly with the number of computer hours logged and number of client transactions, respectively. A tabulation revealed the following data: 

Information Systems Services 255 E-commerce Consulting 75 Number of clients Number of computer hours Number of client transactions 2,480 910 Total 330 6,710 1,770 

Required: 

2. Assume that the firm uses traditional costing procedures, allocating total costs on the basis of billable hours. Determine the profitability of the firm's information systems and e-commerce activities, expressing your answer both in dollars and as a percentage of activity revenue. 

3. Assume that the firm uses activity based costing. Determine the profitability of the firm's e-commerce and Information systems activities, expressing your answer both in dollars and as a percentage of activity revenue. 

4. Jeffrey Grady, one of the firm's partners, doesn't care where his professionals spend their time because, as he notes, "many clients have come to expect both services and we need both to stay in business. Also, information systems and e-commerce professionals are paid the same hourly rate." Should Grady's attitude change? 

Answer 1

Part 2
Calculation of Profits on the basis of Billable Hours (Traditional Costing)
			Information System Services	E-Commerce Consulting	Total
Billable hours		(a)	5,880	3,920	9,800
Revenue per hour ($)		(b)	88	88
Total Revenue ($)		( c) = (a)*(b)	5,17,440	3,44,960	8,62,400
Less: Administrative Cost
{(438760/9800)*5880}		(d)	2,63,256	-	2,63,256
{(438760/9800)*3920}		(d)	-	1,75,504	1,75,504
Profits ($)		(e) = ( c)-(d)	2,54,184	1,69,456	4,23,640
Profit as a % of revenue		(e)/( c)	49.12%	49.12%	49.12%
Part 3
Calculation of Profits on the basis of Activity based Costing
			Information System Services	E-Commerce Consulting	Total
Billable hours		(a)	5,880	3,920	9,800
Revenue per hour ($)		(b)	88	88
Total Revenue ($)		( c) = (a)*(b)	5,17,440	3,44,960	8,62,400
Less: Administrative Cost
Staff Support Cost
(232080/330*255)		(d)	1,79,335	-	1,79,335
(232080/330*75)		(d)	-	52,745	52,745
Inhouse Computing Cost
(164000/6710*4230)		(d)	1,03,386	-	1,03,386
(164000/6710*2480)		(d)	-	60,614	60,614
Miscellaneous Office Charges
(42680/1770*860)		(d)	20,737	-	20,737
(42680/1770*910)		(d)	-	21,943	21,943
Profits ($)		(e) = ( c)-(d)	2,13,982	2,09,658	4,23,640
Profit as a % of revenue		(e)/( c)	41.35%	60.78%	49.12%
Part 4
In case the firm uses Traditional Costing System, Profit percentage to revenues of each department is same at 49.12%. Therefore, time spent by professionals in either department does not matter. However, in case of Activity Based Costing, professionals should spend more time in the E-commrce Consulting Department as it has higher profit % than the Information Sysytem Service Department, despite having the same revenue per hour. Hence the attitude of Grady should change.

Answer 2

Where does the 860 and 910 come from?